The Belarusian Banking Sector Moving Towards Modernisation Despite Some Challenges

There are 26 banks, including 21 with foreign capital, operating in Belarus and five foreign institutions have their representative offices in the country, according to the country’s National Bank. In January 2016, the banks’ aggregate registered authorised capital amounted to 4.5 billion (or €2.2 billion), having increased by 33.4 per cent  compared to 2015.

Igor Likhogrud, chairman of the board at the Moscow-Minsk Bank, spoke to Andrew Wrobel about the Belarusian banking sector, as well as his bank’s current position and future plans including the search for a strategist investor.

I recently spoke to Mr Taras Nadolny, the first deputy chairman of the Belarusian National Bank, which is the largest shareholder of Moscow Minsk Bank and told me that the World Bank’s experts had said the banking sector was well developed and stable and that the level of banking assets to GDP was satisfactory. However they recommended improvements in two areas: the insurance market and the security market. How do you see the development of the banking sector from a bank’s perspective?

There are different segments in the market and, therefore, they are developed differently.  Moreover, these segments have different regulators, today. Their consolidation under a single financial market regulation authority would help to manage this field more efficiently from the standpoint of regulation and would provide for quicker development. 

What concerns the development of the banking sector? The economy is beginning to recover from the crisis. The worst has passed and, considering the revival of the economy, we see a high potential for growth, if not in 2017, then certainly in 2018. Once again the worst is already behind us and for those who could not recover – well, everything is  visible now.

Igor Likhogrud, chairman of the board at the Moscow-Minsk Bank
Igor Likhogrud, chairman of the board at the Moscow-Minsk Bank

The International Monetary Fund recently said that the state-dominated financial sector is confronted by several critical challenges and that the transition to an independent and risk-based overview of the financial sector is urgently required. How do you see that?

This question is somewhat connected with the previous one. 

It is, indeed.

The banking sector is regulated by the national bank and the bank recently also became the regulator for leasing companies and FX organisations. The National Bank strives to follow the best international practice in its ways of doing business and, in particular, it adheres to the Basel principles of banking supervision.

Respectively, as the regulation of the insurance market and the securities market today is under authority of the Government – the Ministry of Finance –  in my opinion the next logical step would to consolidate the other segments of regulation under one body and eventually to allocate it independently. Consolidation under a so-called “mega-regulator” would provide better transparency and uniform rules for all players and would bring some sort of synergy to the sector.

Let’s change the topic slightly now. It is clear that the private sector (SMEs) is not well-developed. Do SMEs have easy access to financing and what products are on offer in Belarus?

It is true that state enterprises dominate today. Nevertheless, the share of small and medium businesses is developing. As an example, our bank provides services for over 10,000 clients, 8,000 of which are small and medium enterprises. The main products when we finance small and medium businesses are credits and leasing. 

It is true that access is limited because it is necessary to provide collateral, something new businesses do not always have. They need a credit history and financial flows. On one hand, it limits opportunities but on the other hand, it creates potential, including the development of banks. One part of our strategy, and one of the parts of our joint cooperation with the European Bank for Reconstruction and Development (EBRD), is to create the necessary conditions to support small and medium businesses, taking into account the experience of international financial institutions on our market. We would also like provide an opportunity to create some standard products and  to streamline processes with the possibility of provisioning the necessary financing to small businesses, on demand.

The Belarusian economy has been affected by the devaluation. What impact has this had on consumer demand? 

Indeed, the national currency devalued in late 2014 and early 2015. Consumer demand fell somewhat and the demand for imports fell as well, as the turnovers in retail dropped. We see it in the turnovers of our clients, in crediting amounts and the population’s salaries. However, we also see potential. We understand that growth will inevitably follow and banking services, in particular, will be demanded to keep up with these changes.

How aware are Belarusian individuals, today, about banking products: credit cards, consumer loans and mortgages and mobile banking? They are all offered by banks in Belarus. Do you see prospects for growth in retail banking?

All these products have a wide circulation in the market and practically all the banks compete in this field. Mobile banking is developing exponentially. For example, we changed our mobile banking service back in June and today, about 20 per cent of our cardholders are using it already. This was achieved without resorting to any significant measures and our estimate is that it will only grow. 

We see potential and that is connected to the economy’s recovery from the crisis and the increase in income, in general. At the same time we see prospects for cooperation with FinTech companies. That is those that create platforms and different IT solutions. There is a capability here  — in this synergy between us the banks with the client bases and banking licenses —to perform particular operations. Those who provide the market with modern IT technologies and solutions are in demand more and more today.

A difficult economic situation can be perceived as an obstacle or as an opportunity. How do you see it?

Well, we definitely see opportunities here and they are encouraging us to keep trying to keep up with global banking trends, and to develop not only technological services, but also to implement unique wide financial and socially-oriented products and services. We are aiming to provide them at exactly the time and place where they are most needed.

In response to the decline in retail consumer demand from the bank’s partners, we launched a unique hire-purchase card. When clients use the card to buy goods they do not pay any fees or commission. The purchase amount does not increase and is automatically divided into several instalments. Our shopping-partners acquire revenue growth, customers get a reduced payment burden and the bank gets a commission from the retailers. This card can be used today to buy almost anything, from a kettle to dinner at the local cafe. 

The so-called “financial bicycles” or “national discoveries” are invented under these types of conditions – periodic devaluations, denominations and other financial stresses – new products that combine simple lending and instalment loans, bonuses and savings programs. Such lending products have not only received high praise from our clients, but also proved their financial efficiency.

I already mentioned that the Moscow-Minsk Bank is mainly owned by the Belarusian National Bank. Where do you see prospects for growth for your bank?

There are actually certain limitations on us in terms of development, particularly because our shareholder is the national bank and, being the regulator, it operates under statutory restrictions, which limit its opportunities for our capitalisation and for the provisioning of resources. 

As a central bank it has strict conditions on the provisioning of resources to banks. So, in order to resolve this conflict, between the owner and the regulators’ being one person, the national bank has initiated preparatory measures for selling the bank.

I will come back to this in a moment but first I would like to ask you about the bank’s current market share.

Our assets currently amount to about one per cent of the market share. However, at the same time, it is necessary to outline our various products. For example, our market share on foreign exchange transactions is roughly 14 per cent, owing to our streamlined processes, our well-adjusted procedures and the sharply-cut interaction between the different business lines within the bank. We work in all segments and have a solid team. Therefore we are the leaders on the FX market in Belarus.

Minsk, Belarus - September 13, 2016: Building of the Bank "Moscow-Minsk" Joint stock Company on Storozhevskaya street

What is your current strategy?

Our strategy is digitally and omni-channel oriented and is targeted at increasing cross-selling through all segments and products as well as developing mobile services for day-to-day banking. We are striving toward growth in the SME segment via specialised products and streamlined processes, as well as the development of transaction banking and FX operations.

So, are you looking for a foreign bank to acquire your shares? How do you think foreign ownership would help the bank to develop?

We rely on the fact that a strategic investor should acquire the bank. Preferably, that it would be a western bank with all its business lines and technologies, which would then be available to us, and therefore we would be able to develop even quicker, especially in such areas as the securities market, risk management and the IT arena.